Finley Painters Co., a painting contractor, maintains a job-order cost system. Job costs are
accumulated by tracking the actual cost of paint and other materials used on each job, as
well as the actual cost of wages earned by the painters on each job. In addition, overhead is
applied to each job by using a predetermined rate based on the actual painters’ wages.
Leonard Wayne, painter, earned $168 today by working on Job 08-45. In computing prime
cost and conversion cost for Job 08-45, how would the wages earned today by Wayne be
Answer (A) is correct. Manufacturing costs are often grouped into the following classifications: prime cost, which equals direct materials plus direct labor (i.e., those costs directly attributable to a product), and conversion cost, which equals direct labor plus manufacturing overhead (i.e., the costs of converting raw materials into the finished product). The wages earned by a painter working for a painting contractor are thus properly classified as both a prime cost and a conversion cost.
Rose Co.’s fixed manufacturing overhead costs totaled $150,000 and variable selling costs totaled $75,000. How should these costs be classified under variable costing?
Answer (D) is correct. Product costs are incurred to produce units of output. They are expensed when the product is sold. Such costs include direct materials, direct labor, and factory (not general and administrative) overhead. Period costs are charged to expense as incurred because they are not identifiable with a product. Variable costing considers only variable manufacturing costs to be product costs. Fixed manufacturing costs are considered period costs and are expensed as incurred. Selling costs are period costs under both direct and absorption costing. Thus, the entire $225,000 ($150,000 + $75,000) is classified as period costs.
All of the following would be considered manufacturing overhead costs by a book publisher except
Answer (C) is correct. Rent paid on the warehouse containing the finished books inventory is an example of an administrative expense, which is not part of manufacturing overhead. This is an example of a nonmanufacturing cost since the warehouse contains the finished books inventory and no manufacturing is occurring in that warehouse. Administrative expenses are those costs incurred by a company not directly related to producing or marketing the product.
An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work in process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationships regarding variable and fixed costs is true?
Answer (C) is correct. Total variable cost changes when changes in activity level occurs within the relevant range. The cost per unit for a variable cost is constant for all activity levels within the relevant range. Thus, if the activity volume increases within the relevant range, total variable costs will increase. A fixed cost does not change when volume changes occur in the activity level within the relevant range. If the activity volume increases within the relevant range, total fixed costs will remain unchanged.
Which one of the following categories of cost is most likely not considered a component of fixed factory overhead?
Answer (D) is correct. A fixed cost is one that remains unchanged within the relevant range for a given period despite fluctuations in activity. Such items as rent, property taxes, depreciation, and supervisory salaries are normally fixed costs because they do not vary with changes in production. Power costs, however, are at least partially variable because they increase as usage increases.
The difference between variable costs and fixed costs is
Answer (B) is correct. Fixed costs remain unchanged within the relevant range for a given period despite fluctuations in activity, but per unit fixed costs do change as the level of activity changes. Thus, fixed costs are fixed in total but vary per unit as activity changes. Total variable costs vary directly with activity. They are fixed per unit, but vary in total.
Which of the following is the best example of a variable cost?
Answer (B) is correct. Variable costs vary directly with the level of production. As production increases or decreases, material cost increases or decreases, usually in a direct relationship.
A company has the following budget formula for annual electricity expense in its shop: Expense = $7,200 + (Units produced × $0.60) If management expects to produce 20,000 units during February, for the purpose of performance evaluation, what amount of expenses should the company expect to incur in February?
Answer (C) is correct. The formula is for an annual period. Thus, the first step is to divide the $7,200 of fixed costs by 12 months to arrive at monthly fixed costs of $600. Variable costs will be $.60 per unit, or $12,000 for 20,000 units. The total expected expenses are therefore $12,600 ($600 + $12,000).
The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
Answer (C) is correct. A marginal cost is the sum of the costs necessary to effect a one-unit increase in the activity level
Scott Company uses the following formula for annual maintenance costs: Total cost = $6,000 + $0.70 per machine hour The current month’s budget is based on planned machine time of 30,000 hours. Monthly maintenance cost included in this budget is
Answer (C) is correct. The maintenance cost is a mixed cost containing both fixed and variable elements. To calculate the monthly total fixed costs, divide the annual amount by 12.
Monthly fixed maintenance costs: $6,000 ÷ 12 = $ 500
Variable maintenance costs: 30,000 × $0.70/hour = 21,000
Total maintenance costs $21,500